1. Field of the Invention
Present invention relates generally to a method and system for initiating pairs trading, and more particularly, to initiate pairs trading across multiple markets, including foreign markets, and automatic foreign exchange price hedge.
2. Description of Related Art
Pairs trading is an investment strategy that, in its basic form, involves the purchase of one or more securities while simultaneously selling (or selling short) one or more other securities. A pairs trade often involves companies that are related or linked in some manner (for example, within the same industry) and attempts to limit market or sector exposure while emphasizing only the performance of one or more securities relative to one or more other securities. Conducted in the correct ratio, pairs trading removes general market risk, thereby leaving the investor “market neutral,” while having the ability to capitalize on the relative strength of one or more securities relative to one or more other securities. Pairs trading may include investment strategies such as risk arbitrage, convertible arbitrage, bond arbitrage, comparative arbitrage, and the like and may include the trading of stocks, futures, options bonds, debt instruments, currencies, and the like.
Pairs trading is employed not only by individual investors, but also by investment fund managers and other investment professionals. Furthermore, such investors routinely diversify their portfolios by investing in pairs in a variety of markets or sectors. However, continually monitoring, managing, and trading multiple pairs strategies in several different markets can be a complex burden on an investor. Adding further complexity, market conditions are constantly changing, which makes it necessary for traders to alter strategies and equations used to determine whether a trade is desirable in the current market.
Further, with greater regularity, investors are entering into cross-border pairs transactions, each time buying or selling securities in a foreign currency. As such, entities often realize transactions in foreign currencies, and therefore, the accounting records of the entity potentially reflect positions in multiple currencies. Consequently, determining the aggregate value of the positions at any given instant is difficult. A similar problem exists when an entity first considers entering into a cross-border transaction. Often, an entity will have the option of entering into the same transaction, for example, the sale of a security, in any one of multiple currencies, thereby receiving bids in multiple currencies. Such option can be meaningless if the entity cannot translate each bid into a common currency. Moreover, when buying and selling securities in a foreign currency, the entity buying and selling the securities is exposed not only to typical market risks, but also to the additional risk associated with the exposure to the foreign currency.
Accordingly, a need exists for an automated system that can help manage an investor's portfolio, including continuously monitoring the relationships of pairs in various markets and automatically executing transactions based upon the realization of specific parameters chosen by the investor or the investor's agent. Additionally, a need exists for a dynamic system that will allow for an administrator to easily edit or update the system to reflect changing market conditions with minimal or no code revisions. Further, a need exists for a system that can monitor the relationships between securities in various foreign currencies and revalue such securities into a single currency in order to facilitate an investor's automated pairs trading strategy.